US Durable Goods Orders Continue to Fall

As readers know, I think Durable Goods Orders are one of the best economic indicators available. Why? Because it’s real economic data, not a survey of business expectations like the ISM index. Durable Goods collapsed in June, down 4% from the prior month (versus expectations of -1.4%), the biggest drop since August, 2014. This represents a 6.6% decline from one year ago. Meanwhile, core durable goods orders have now posted year-over-year declines for 18 straight months, thelongest streak of declines in U.S. history outside of a major recession.

Within the Durable Goods Report is a subset known as the Non-Defense Capital Goods Orders Ex. Aircraft, a number that closely approximates capital spending by businesses. Poor capital spending is one of the main reasons why the U.S. economy is failing to grow. Since recovering from the Great recession in 2011, capital spending has been trending steadily down.

Not surprisingly, a business sector that does not invest in itself doesn’t grow earnings. With 86% of the companies in the S&P 500 reporting earnings to date for Q2 2016, 69% have reported earnings above the mean estimate. Sounds good, right? Wrong. Earnings growth for Q2 2016 is negative — minus 3.5%. Earnings beat the estimates because companies took down their estimate just before the quarter ended, so they could ‘beat’ them. Based on the earnings reports to date for Q2, we are going to see five consecutive quarters of year-over-year declines in earnings for the first time since the financial crisis of Q3 2008 through Q3 2009.

According to FactSet, Q3 doesn’t look any better: 53 companies have issued negative EPS guidance so far compared to just 26 companies that have issued positive EPS guidance.

There is a growing divergence between the earnings and the share price performance of the S&P 500 as the chart below shows. This gap has to close. Either share prices have to fall or earnings have to soar. Tell me how earnings can soar when Durable Goods orders keep falling and American businesses aren’t investing in their own future?

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Who is Wayne Wile?

Wayne Wile is an international investment advisor with more than five decades of experience in wealth management. He has spent the majority of his career working with institutional and high net worth investors, seeking to mitigate risk while optimizing portfolio performance.

Wayne began work in the mailroom of a brokerage firm when he was 17 years of age and rose to a senior executive position. He was recruited for key jobs with several nationally recognized investment firms in Canada before striking out on his own.

Wayne’s methods as a trader are governed by simplicity and self-discipline. He says that losses are the children of greed and fear while profits are the spawn of patience and trend-following. “Time is always on your side. Let the market tell you what it wants to do and keep it company. Never chase an idea you think you have missed. There is always another one coming along.”

Wayne is especially opposed to sophisticated trading strategies that try to predict the future based on mathematical analysis of historical data. “These systems routinely destroy far more wealth than they create,” he says. “Only a highly intelligent, well-educated individual would be foolish enough to do this stuff. Successful traders need to stop analyzing and learn to listen to what the market is telling them every day.”

Wayne resides in the Cayman Islands but considers himself a citizen of the world.